What is a Tax Credit Extension?

Dale Marshall
Dale Marshall
A W-9 form, a type of US tax form.
A W-9 form, a type of US tax form.

A tax credit extension is the delaying of the deadline established for a temporary tax credit. Under the American system, when a government — national, state or local — wants to encourage certain financial behavior, it may establish tax credits related to that behavior, which must be used within a certain time frame. The government may, to its discretion, widen the time frame, or postpone the deadline by implementing a tax credit extension. Tax credits are very popular because they reduce the actual tax liability, while deductions and exemptions only reduce the amount of income subject to income tax. Although in general, the U.S. Congress lets most temporary tax credits expire on schedule, at times it will pass a tax credit extension for those that are extremely popular, or are having the intended impact on the economy.

Congress sometimes establishes temporary tax credits for specific purposes, to encourage specific activities or behavior. In many cases, these tax credits have been for exotic purposes or businesses for which most individual taxpayers didn’t qualify. One such tax credit was the Section 41 Research & Development Tax Credit. This credit, introduced as part of the Economic Stimulus Act of 1981 and designed to reward those businesses that incurred R&D expenses in the United States, was scheduled to expire at the end of 1985, but was extended 13 times through the early 21st century.

Some temporary tax credits have been formulated for the benefit of individual taxpayers. The Economic Stimulus Act of 2009 included a tax credit of $8,000 US Dollars (USD) for taxpayers who purchased a home during the entire year of 2009. The credit was designed to encourage taxpayers to purchase homes and thus stimulate the economy; some estimated that it was responsible for the sale of around 200,000 houses nationwide. The credit proved so popular and successful that at the end of 2009, there was a significant backlog of home sales that couldn’t be closed by the December 31 deadline. In November of that year, Congress enacted a tax credit extension until the end of April 2010; in July of 2010, it partially extended the credit again by permitting purchasers who had signed contracts by the April 30 deadline to claim the credit if they closed on the sale by the end of September 2010.

Another popular tax credit is the Residential Energy Tax Credit. Instituted in 2005, it provided for a tax credit of 30% of the cost of certain materials for home repair and renovation. The materials had to meet certain standards of energy efficiency, and the credit was capped at $1,500 USD for most components, but was uncapped for geothermal heat pumps, solar energy systems and small wind turbines for residential use. The credit was set to expire at the end of 2008 but was extended to the end of 2010, with the provision that the $1,500 cap covered both years’ expenses in the aggregate.

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    • A W-9 form, a type of US tax form.
      A W-9 form, a type of US tax form.